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Issue #690: What a weekend that was...

Issue #690: What a weekend that was...

Mar 9, 2020
Marty's Ƀent

Issue #690: What a weekend that was...

We're in the midst of a perfect storm, freaks. A lining up of market events that is laying bare the fragility of an interconnected financial system built on debt and financial engineering. As I said last week, COVID19 seems to be a Black Swan event that has caught the world off guard. With the reaction to the spread shutting down global supply chains and grinding our globalized economy to a halt. The lagging effects of the supply chain shut downs, if they materialize, should be hitting the markets in the next couple of weeks.

Over the weekend as the world was fixated on Italy's imposed quarantine and the spread of the virus through the US, Russia came out of nowhere and molly-whopped the markets with another Black Swan when it told the oil cartel that is OPEC that they were not going to fall in line and curb production to support oil prices. It seems this did not go over well with Saudi Arabia, who immediately dropped the price of their oil and announced a huge ramp up of production. This caused oil prices to plummet by more than 30% with WTI crude currently trading at $34.35 after temporarily falling below $30 during futures trading yesterday. The move by Russia is being seen as a shot at the US shale industry and their production, which has been flooding the global markets with more supply.

The oil wars are something we've been documenting for some time here at The Bent. For years, countries outside of OPEC who seem to be unhappy about the reality of the petrodollar, which forces countries to purchase oil in US Dollars, have been posturing that they want things to change. This has led to the creation of oil contracts denominated in yuan and rubles and more direct trade between Iran, Russia and China. The question that's been looming on the top of some people's minds for the last couple of years is, "when do we see a complete pivot away from OPEC and towards a more bifurcated global oil market?" Well, it seems like Russia is finally comfortable enough to flip the bird to the oil cartel and walk away. It will be very interesting to see the ripple effects that are caused by this bold move in the coming months and years.

Here's one of the most important charts to consider as the oil wars heat up; the cost of extracting a barrel of oil by country. (Provided, of course, by our good friend Arbedout, who has been one of my favorite sources on this macro theme throughout our coverage. I highly recommend you read the whole thread.)

As you can see, Saudi Arabia and other producers in the Middle East can weather the storm much better than its counterparts around the world. With that being said, Russia has come out to let the markets know just how low they can go and for how long they can sustain a war of attrition.

If this turns out to be a vindictive war in which Saudi Arabia aims to make those who slighted the oil cartel they are at the center of feel the pain; I would expect prices to fall below the line drawn by the Russian Finance Ministry. Things are about to get very interesting for US Shale producers. Can they weather the storm? We shall see. Silver lining: cheap gas is on the way, freaks!

In reaction to the oil market cucking by Russia, stock markets imploded yesterday and this morning with S&P 500 futures trading limit down (-5%) last night and quickly being halted minutes after the official open this morning. A perfect storm of macro events is currently pummeling stocks, acutely highlighting the fragility of our system. This is very important to understand. The combination of the virus and Russia going rogue may be the impetus for this market downturn, but they are not the core cause of the problem. The structural fragility of a financial system addicted to cheap debt is. Our friend James O'Beirne put it much more eloquently than your Uncle Marty.

Corporate debt, which has increased significantly under a low rate regime that has led to a massive wave of stock buybacks, is going to be tested in a big way. Keep an eye on the CLO markets. I fear they will not be able to handle the stress. It seems like the Fed has the same fears, as they significantly raised the amount of money they are willing to provide during overnight repo operations by 75%; increasing one day loans to $150B from $100 and two-week funding to $45B from $20B.

All eyes are on Jerome Powell and the Fed as we approach the next FOMC meeting scheduled for the 17th-18th of this month. How much are they going to cut? Are they going to turn to QE4 to quell markets? Only time and the severity of the continued decline in markets will tell. Last weeks 50bps cut proved to be wholly ineffective. It would seem to me that they have to make drastic moves to quell these markets.

Now, how has this affected bitcoin and how will it affect bitcoin moving forward? So far, bitcoin has dumped with the markets. Acting as a risk-on asset as investors liquidate holdings for cash that is desperately needed elsewhere. Certainly not acting like the safe haven it is marketed as. Though, this is really not surprising considering how young the protocol is and how little familiarity most investors have with bitcoin. An asset has to earn its safe haven stripes and bitcoin's track record is probably too short for investors to consider it a proper safe haven asset at the moment. This is coming from someone who wholeheartedly believes the safe haven narrative will eventually come to fruition and finds safety from a meltdown of the traditional system in sats.

"Uncle Marty, you're crazy, man. Are you a masochist?"

Maybe. Or maybe I just understand the fundamentals of the protocol and they are only improving from what I can see. Just this morning, around 7:05AM EDT, the difficulty to mine bitcoin increased by almost 7% to help get the average time between blocks back to 10 minutes. Signaling that a material amount of hash rate joined the network over the course of the preceding 2,016 blocks. On top of this, Bitcoin Core - the most popular full node implementation - released v0.19.1 of their software this morning, which signals that the development community is still interested in improving Bitcoin.

And most importantly, as you may be able to tell if you've been reading this rag in recent weeks, the traditional system and the powers that be seem to be losing control. I believe there is a looming crisis of confidence in the efficacy of Fed policy, the ability of the federal government to micromanage the US, and the dream that is sold to the masses by the financial and traditional media.

It's a fool's errand to make these type of calls, but your Uncle Marty is a crazy fool. I find it very hard to believe that the masses buy the bullshit this time around if we are really about to experience "The Big One" that's been talked about since the reaction to 2008. If the expansion of the Fed's monetary base and drastic cutting of interest rates didn't work after the last crisis, why would it work this time around? Can rate cuts and money printing really solve systemic issues which have been laid bare by a virus and a single country deciding to keep its oil production steady? I really doubt it. If anything, the most these policies will be able to achieve is a temporary fix that exacerbates the problem even further.

With that being said, I'm not even sure their policies will be that effective. 2008 is still very fresh wound that people have not forgotten. Couple this with the fact that the dissemination of information has become much more streamlined since 2008 and I find it hard to believe people buy the Fed's pitch this time around. The plebs are more educated than ever on the subject and have joined the conversation on social media. Force feeding the public these policies seems like a much harder task this time around. And furthermore, the Fed's quiver is looking pretty empty at the moment.

This is why I feel comfortable finding safety in sats, even as the price of bitcoin gets crushed. I believe we are living during one of the most pivotable inflection points in human history. Individuals the world over are starting to question the institutions of the Industrial Era and having hard conversations in the Digital World about the type of future they want to see. Bitcoin will emerge as a cornerstone of the Digital Age we are quickly transitioning into. We need a systemic change. We need to fix the money if we want to actually solve these problems and Bitcoin provides the best chance of doing that in the Digital Age in my opinion.

In the short-term, I am interested to see how the market reacts to the next wave of inevitable rate cuts from the Fed. If they cut significantly and markets react like they did to last week's 50bps cut, I think confidence will erode much faster than people expect. If rate cuts and QE provide some respite from the market turmoil, we're probably in for more of the same for a bit.

Regardless of what happens, I'll be stacking sats.

Final thought...

Twitter, man. One hell of a drug.


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